VIENNA, July 13 (Reuters) - Iran is preparing to install
centrifuges for higher-grade uranium enrichment in an
underground bunker, diplomatic sources say, a development that
is likely to add to Western worries about Tehran's atomic aims.

Preparatory work is under way at the Fordow facility, tucked
deep inside a mountain to protect it against any attacks, and
machines used to refine uranium could soon be moved to the site
near the clerical city of Qom, the sources said.

The Islamic Republic said in June it would shift production
of uranium enriched to 20 percent purity to Fordow from its main
Natanz plant this year and triple output capacity, in a defiant
response to charges that it is trying to make atomic bombs.

Tehran only disclosed the existence of Fordow two years ago
after Western intelligence detected it and said it was evidence
of covert nuclear activities. The facility has yet to start
operating.

"They are preparing (for the centrifuges to be installed) in
Fordow," one diplomatic source said.

Refined uranium can be used to fuel nuclear power reactors
and also, if enriched to much higher levels, provide material
for atomic arms.

Iran's June announcement that it would move and boost output
has drawn censure from the West, which has imposed increasingly
tough sanctions on Tehran to try to force it to halt enrichment.

Carrying out the process in Fordow could provide greater
protection for Iran's uranium-purifying centrifuges against any
U.S. and Israeli air strikes.

Iran denies seeking nuclear weapons and says it is enriching
uranium for electricity production and medical applications.

But its decision in early 2010 to raise the level of
enrichment from the 3.5 percent purity needed for normal power
plant fuel to 20 percent worried countries that saw it as a
significant step towards the 90 percent needed for bombs.

IRAN DENIES NUCLEAR ACCUSATIONS

Iran says it needs 20 percent uranium to make fuel for a
medical research reactor after talks on a swap -- under which
other countries would have supplied the material -- broke down.

"Enrichment from natural uranium to 20 percent is the most
time-consuming and resource-intensive step in making the
highly-enriched uranium required for a nuclear weapon," British
Foreign Secretary William Hague wrote in the Guardian newspaper
this week.

"And when enough 20 percent enriched uranium is accumulated
at the underground facility at Qom, it would take only two or
three months of additional work to convert this into weapons
grade material."

The Institute for Science and International Security, a
U.S.-based thinktank, has said the Fordow plant could, a year
after its implementation, enable Iran "to more quickly break out
and produce enough weapon-grade uranium for a nuclear weapon, if
it chose to do so".

Some Western experts say Iran is seeking to develop the
means to make nuclear bombs.

"We see Iran moving in the direction of becoming a nuclear
weapons capable state," said Olli Heinonen, a former head of
U.N. nuclear inspections worldwide.

Iran says that building nuclear bombs would be a strategic
mistake and that it would also be against Islam.

"Our Supreme Leader (Ayatollah Ali Khamenei) has explained
that the production and use of atomic weapons is wrong, not only
in terms of foreign policy but on religious grounds," Iranian
Foreign Minister Ali Akbar Salehi said in Vienna on Monday.

In its latest report on Iran, in late May, the U.N.
International Atomic Energy Agency said Iran had told it in
February of plans to begin feeding nuclear material into
enrichment centrifuges at Fordow "by this summer".

But the IAEA added that as of May 21 no centrifuges --
cylindrical machines spinning at supersonic speeds to increase
the level of the fissile U-235 isotope -- had been introduced
into the facility.
(Additional reporting by Sylvia Westall)